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Is Recasting a Mortgage Loan a Better Option Than Refinancing?

While many homeowners are familiar with the option of refinancing their mortgage, not all homeowners understand loan recasting. This may be because not all lenders offer recasting or re-amortizing, and not all borrowers are eligible. However, the process could save you money in two ways: by reducing your monthly mortgage payment, and by allowing you to avoid the cost to refinance.

Essentially, a loan recast means that while your interest rate and your loan term remain unchanged, your monthly mortgage payment is reduced to reflect your actual current loan balance. For example, if you’re 6 years into a 30-year mortgage, once you recast your loan, you will still have 24 years remaining to pay it off. For recasting to work, lenders require an additional lump sum payment to reduce your balance. The size of that additional payment impacts how much you can save with a loan recast. However, instead of recasting, you could pay a lump sum toward your existing loan, which would decrease your balance, but not reduce your monthly mortgage payment.

How Loan Recasting Works

Loan recasting can make sense if you inherit money (or receive a significant bonus at work) and wish to apply it to the balance on your mortgage. Because you reduce the balance ahead of schedule, you ultimately will pay less interest. This then enables lenders to recast your loan, or recalculate your monthly mortgage payment.

Individual lenders have different requirements for loan recasting. For example, some lenders require a lump sum payment of $5,000 or 10% of the loan – whichever is greater – to reduce the balance before qualifying someone for a loan recasting.

If you have a $400,000 mortgage at 4% interest for 30 years, your monthly principal and interest payments would be $1,910. If you pay the loan for 10 years, your remaining loan balance would be $315,136. A lump sum payment of 10% of the remaining loan balance would be $31,554, bringing the balance to $283,582. In this case, the monthly payments would reduce to $1,718. However, keep in mind that while saving $200 per month on your mortgage payment is a worthwhile goal, you will also have spent a significant amount of cash to achieve that reduction in payment.

Of course, lenders do charge a small fee for loan recasting, which is often as low as $250.

Determining Eligibility

Loan recasts are allowed on conventional, conforming Fannie Mae and Freddie Mac loans, but not on FHA mortgage loans or VA loans. Some lenders recast jumbo loans, but consider them on a case-by-case basis.

In order to qualify for a loan recast, you must be current on your loan payments, and have the cash necessary to pay down your principal balance. A credit check and an appraisal are not necessary.

Advantages of Loan Recasting

Reduced Payment. By recasting your loan, you can ease your cash flow without the expense of a home refinance, which can require an expenditure of as much as 6% of your loan balance. In fact, in some cases, what would be spent on the refinance could be used to reduce your balance enough to qualify for a loan recast.

No Appraisal Required. Unlike a home refinance, a loan recast does not require an appraisal. If your home has dropped in value, you may not be eligible for a refinance, since most lenders only refinance a home with at least 5% to 10% in equity.

No Credit Check Needed. Loan recasts generally do not require credit approval. If you have credit issues and cannot qualify for a refinance, you may still qualify for a loan recast.

In one specific case, loan recasting can be particularly beneficial. If you are a homeowner who has purchased a new home before selling your current home, you may temporarily need to pay two mortgages. Once you have sold your previous home, you can use the profit from that home sale to pay down your loan balance and recast your mortgage to make the payments more affordable. Many homeowners deliberately plan to use loan recasting for this purpose when moving from one home to another. Just remember that you typically need to wait 90 days after your loan goes to settlement before you can recast it.

Disadvantages of Loan Recasting

Before you decide to recast your loan, you would be wise to evaluate it in the context of your entire financial plan. Some of the disadvantages of loan recasting include:

Ties Up Cash. If you have a lump sum of cash, make sure that paying down your mortgage is the best use of that money. For instance, if you have high-interest credit card debt, you should absolutely pay that off first. If you lack an emergency savings fund or need to set aside money for other expenses, it’s probably best that you not put your entire windfall toward paying down your mortgage.

Doesn’t Reduce Mortgage Term. You should also consider loan recasting in the context of your retirement. Many older homeowners hope to pay off their mortgage before they retire. However, a loan recast will not shorten your loan term, although it could improve your cash flow. If your goal is to reduce your mortgage balance, switching to biweekly mortgage payments or simply making regular extra payments to your principal may be a better option than a loan recast.

Doesn’t Reduce Interest Rate. If you are paying a high interest rate, a refinance may be a better option. A lender can compare the costs and monthly payments on a refinance and a loan recast to determine which is the best fit for you.

Final Word

Loan recasting isn’t for everyone, but if you have extra cash, consult your lender to see if this method of reducing your monthly payment is right for you. If you are a homeowner who is selling one home and moving into another, you could very well benefit from a loan recast. Those who own a home with reduced value or have credit challenges may also benefit more from a loan recast than refinancing.

Can you think of other scenarios in which a loan recast would be a wise financial move?

Michele Lerner, author of "HOMEBUYING: Tough Times, First Time, Any Time," has been writing about personal finance and real estate for more than two decades for a variety of publications and websites including Bankrate, Investopedia, Insurance.com, National Real Estate Investor, The Washington Times, Urban Land, NAREIT's REIT, and numerous Realtor associations.

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